Associate Professor Michael King wrote an op-ed for Canadian Investment Review on the effects and importance of lower oil prices for the Canadian economy.
To examine these effects, King looked at how the Bank of Canada’s (BoC) monetary policy factors in oil price uncertainty and the accuracy with which oil prices can be forecasted.
“The key is to take this uncertainty into account when evaluating your options,” said King. “The BoC explicitly checks the sensitivity of its economic forecast to various factors or ‘risks’ that it does not control.”
In terms of price forecasting, not even oil-industry experts feel they can accurately predict oil prices. “Given the conclusion that the oil price is a random variable, the BoC assumes oil prices will remain near their recent levels over the projection horizon,” said King.
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